Contracts for construction works performed using subcontractors: Specific rules for settlement of fees

Conditioning payment to the general contractor on prior payment of the subcontractors’ fees and the ability for subcontractors to obtain direct payment from the contracting authority are methods used in the Public Procurement Law to protect subcontractors against dishonest general contractors.

Prior to 24 December 2013, when amendments to Poland’s Public Procurement Law went into effect, the method of setting the fee in the case of contracts for construction works between the contracting authority, the general contractor and subcontractors was governed by general rules, including Civil Code Art. 6471 §5. The contracting authority and the general contractor were jointly and severally liable for payment of the fee for construction works performed by a subcontractor whose subcontract had been approved by the contracting authority. Thus if the general contractor failed to pay the subcontractor its fee, the subcontractor could demand payment not only from the general contractor, but also from the contracting authority.

This solution proved insufficient for Polish lawmakers. Too often payments were made between general contractors and subcontractors late or not at all. This in turn translated into a worsening in the financial situation of entities involved in carry out construction projects and a growing unwillingness to take on such work due to a high risk of loss of financial liquidity.

Thus in order to provide stronger protection to subcontractors, the Parliament enacted Art. 143a and Art. 143c of the Public Procurement Law. This protection extends to all subcontractors working for general contractors carrying out construction works contracts, whether the subcontract is for construction works or for supplies or services. The new rules also apply to contracts at the further level, between a subcontractor and a sub-subcontractor.

Art. 143a requires the contracting authority to pay the fee to the general contractor only after the general contractor presents proof of payment of the fees due to subcontractors and any sub-subs taking part in performing construction works presented for acceptance. The situation is similar when the contractor is to receive the entire payment from the contracting authority only after completion of the works. In that situation, the contractor will receive an advance only upon presentation of proof of settlement with the subcontractors and sub-subs.

Moreover, if the general contractor’s fee is payable in instalments, the contracting authority has a right to withhold up to 10% of the general contractor’s fee for the final instalment of the fee. In this way, the contracting authority can assure that it has funds available to pay subcontractors and sub-subs if the general contractor carrying out the construction works has not lived up to this obligation. The percentage amount of the final instalment must be expressly stated in the terms of reference for the procurement.

Payment of the fee or advance may be withheld only if the contractor does not comply with its financial obligations toward subcontractors for construction works when the subcontract has been approved by the contracting authority, and subcontractors for supplies or services when the subcontract has been presented to the contracting authority.

The contracting authority will required to pay the subcontractor only when its fee has become due and payable and the subcontract for construction works was approved by the contracting authority or the subcontract for supplies or services was presented to the contracting authority. Moreover, the contracting authority will pay the fee only for amounts that arose after approval or presentation of the subcontract. Because payment of the fee directly by the contracting authority is the consequence of circumstances for which the contracting authority is not responsible, it is not required to pay the subcontractor interest for the general contractor’s delay or any other amounts which the general contractor may have been required to pay to the subcontractor.

Before the contracting authority makes a direct payment, it should inquire of the general contractor whether the demand by the subcontractor is justified. If the general contractor shows that the subcontractor is not entitled to the fee (e.g. because it is not yet due and payable), the contracting authority is not required to make the payment. If there are justified doubts whether the direct payment is justified, the contracting authority will be entitled to deposit with the court an amount to cover the subcontractor’s fee.

An immediate consequence of this regulation for the general contractor carrying out a procurement for construction works and failing to make timely payment to subcontractors will be a corresponding reduction in the fee paid to the general contractor by the contracting authority—whether the general contractor seeks payment of the fee or an advance without having settled amounts owed to subcontractors, or the contracting authority has paid the subcontractors directly. Moreover, timely payment of the subcontractors’ fees by the general contractor is encouraged by a sanction in the form of a new grounds for renunciation of a public procurement contract under Art. 143c(7) of the Public Procurement Law. If the contracting authority is repeatedly forced to make direct payments to subcontractors and sub-subs, and the amount of the payments exceeds 5% of the value of the procurement, the contracting authority may renounce the contract with the general contractor.

Both Art. 143a and Art. 143c reinforce the position of subcontractors and sub-subcontractors taking part in performance of construction works. It should be stressed that introduction of these provisions has not resulted in amendment or repeal of the rules concerning subcontracts set forth in Civil Code Art. 6471.

Natalia Rutkowska, Infrastructure & Transport and Public Procurement & Public-Private Partnership practices, Wardyński & Partners